Commercial Real Estate (CRE) Outlook for 2018
Posted: December 28, 2017 at 12:00 AM by Anna Jotham
Forecasters predict modest growth for the commercial real estate (CRE) industry throughout 2018, and analysts have pinpointed several CRE trends to watch, to empower investor decisions in the coming year.
2018/2019 CRE Forecast: Transaction Volume Higher than Average
The Urban Land Institute (ULI) Consensus Forecast projects that commercial real estate will experience transaction volume totaling $450 billion in 2018, and $430 billion in 2019—numbers that are higher than average. The survey of real estate economists in the United States is detailed in “Forecast: Commercial Real Estate to Grow Modestly by 2019,” on rismedia.com.
According to the article, analysts attribute the projected growth to tax code reform, a reduction in regulatory requirements and an anticipated investment in infrastructure. At the same time, forecasters did not upgrade real estate returns, anticipating that new supply in development and a hike in interest rates could create market uncertainty. The forecast did call for an increase in single-family housing starts, projecting 920,000 in 2019, over 781,500 in 2016. Meantime the forecast anticipates CRE price growth will head below historical averages to 3.5 percent in 2018 and 3 percent in 2019.
CRE Trends to Watch in 2018
At the 2017 Commercial Economic Issues & Trends Forum in November, forecasters offered three real estate trends for investors to watch when making decisions about investment moves in the coming year. Notably, they don’t line up perfectly with the ULI report.
1) Question the Dominant Narratives
In “3 Commercial Real Estate Trends to Watch in 2018,” on the National Association of Realtors blog, JLL Chief Economist Ryan Severino warns that while the nation may see a short-term economic boost from reform, tax cuts alone are not likely to boost the economy in the long run. Instead, tax cuts may boost the deficit and result in a drag on CRE as well as all aspects of the economy. In addition, he cautions that media reports on office sector trends should be taken with a grain of salt. While many reports indicate there is a mass commercial office space relocation back to cities, the majority of companies constructing new office buildings to better attract talent are doing so in the suburbs, according to his data.
2) The 2018 CRE Market Looks Sunny, but Growth May Slow into 2019
National Association of REALTORS, Chief Economist Lawrence Yun predicts that rents will be positive for the most part, with a modest price correction in large cities and for “trophy” properties. But he predicts a standoff between buyers and sellers, with landlords commanding higher rents and prices, and buyers watching interest rates, unwilling to increase their offers.
3) Changes Coming to Retail, Multifamily and Industrial Sectors
Severino says retail store openings have outpaced closings in 2017, and rents are rising due to a pause in construction of new retail and a net increase of 4,080 stores nationally. Meanwhile, although multifamily and industrial sectors have performed well in recent years, both Yun and Severino urge caution moving forward. With changing demographics, the population of those at prime renting age is poised to increase in 2018 and 2019, after which it is projected to fall. Meanwhile, the swell in industrial construction to meet the needs of online retailers may decrease future demand.
With a number of economic and demographic factors due to impact the CRE market in 2018, it’s no surprise that analysts have differing takes on how these shifts will impact the industry. Investors would be wise to follow changing market conditions and the political landscape, as always, to make the most informed decisions.
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